What Is the Statement of Changes in Net Assets?

Nonprofits and government entities use the statement of changes in net assets to track financial shifts over time. Unlike for-profit companies focused on profits, these organizations rely on this statement to show changes in their resources.

Understanding this statement helps stakeholders assess financial health and sustainability. It highlights changes from revenues, expenses, gains, and losses, offering insight into an organization’s operations.

Purpose in Financial Reporting

The statement of changes in net assets links an organization’s activities to its financial position, detailing how resources fluctuate due to operational and non-operational factors. This transparency is crucial for donors, grantors, and oversight bodies evaluating financial management.

Regulatory compliance is also essential. Nonprofits in the U.S. follow Financial Accounting Standards Board (FASB) guidelines under ASC 958, while government entities adhere to Governmental Accounting Standards Board (GASB) standards. These regulations ensure accountability and prevent financial mismanagement.

Beyond compliance, this statement helps organizations make informed financial decisions. By analyzing trends, management can determine if funding sources are stable, if expenses are growing too quickly, or if adjustments are needed to maintain financial health. A nonprofit heavily reliant on grants, for example, may use this statement to assess whether it should diversify revenue streams to reduce financial risk.

Components Affecting Net Assets

This statement reflects financial activities that influence an organization’s resources, including revenue inflows, expense outflows, and adjustments to asset classifications. Understanding these components helps stakeholders interpret how financial decisions and external factors affect stability.

Additions

Additions represent increases in net assets, primarily from revenue sources such as contributions, grants, program service fees, and investment income. Nonprofits rely on donations, which may be unrestricted—usable for any purpose—or restricted, requiring funds to be spent on specific programs.

Investment income, including interest, dividends, and realized gains from asset sales, also contributes to net asset growth. For example, if a nonprofit’s endowment fund earns $50,000 in dividends annually, this amount is recorded as an addition. Government grants, which often have specific usage requirements, increase net assets when received and recognized as revenue.

Gains from asset sales or fundraising events further increase net assets. If a nonprofit sells a building for $500,000 with a book value of $400,000, the $100,000 gain is recorded as an addition. These increases help organizations expand programs, cover operational costs, or build reserves.

Deductions

Deductions reduce net assets and consist of expenses, losses, and distributions. Operating expenses such as salaries, rent, utilities, and program costs are the most common deductions. If a nonprofit spends $200,000 annually on staff salaries, this amount is recorded as a deduction.

Losses from asset sales or investment declines also decrease net assets. If an organization sells an investment for $30,000 that was originally purchased for $50,000, the $20,000 loss is recorded as a deduction. Unrealized losses on investments, which occur when asset values decline but are not yet sold, may also be reflected in financial statements.

Grants or scholarships distributed by an organization can also be considered deductions. A nonprofit providing $100,000 in scholarships annually records this as a reduction in net assets. These deductions highlight financial commitments that affect an organization’s ability to sustain operations.

Reclassifications

Reclassifications occur when funds move between net asset categories due to changes in donor restrictions or board designations. For example, if a donor initially restricts a $50,000 contribution for a specific program but later allows it for general operations, the amount is reclassified from restricted to unrestricted net assets.

Board-designated funds, which are internally earmarked for specific purposes, can also be reclassified. If a nonprofit’s board sets aside $200,000 for a future capital project but later reallocates it for operational expenses, the reclassification is recorded in the statement.

Endowment funds may also experience reclassifications based on investment performance. If an endowment generates income exceeding the required spending policy, the excess may be reclassified from restricted to unrestricted net assets. These adjustments ensure financial statements accurately reflect the intended use of funds.

Classifications of Net Assets

Net assets are categorized based on the level of control an organization has over them, shaping financial planning and reporting. Proper classification ensures transparency, especially for organizations receiving contributions with specific conditions. Misclassifying assets can lead to compliance issues and financial misstatements.

Nonprofits follow FASB guidelines under ASC 958, which require net assets to be classified into two categories: without donor restrictions and with donor restrictions.

The first category includes funds available for general use, often derived from service revenue, unrestricted donations, and investment returns not subject to donor-imposed limitations. This flexibility allows organizations to allocate resources based on operational needs, such as administrative costs or new initiatives.

The second category, net assets with donor restrictions, includes funds designated for specific purposes or timeframes. Donors may require contributions to be spent only on certain programs or stipulate that the principal amount be maintained indefinitely while only the investment earnings are used. Endowments are a common example, where the original donation remains intact while the generated income supports ongoing activities. Organizations must carefully track and report these funds to ensure compliance with donor agreements.

How It Relates to Other Statements

The statement of changes in net assets connects with other financial statements, offering a detailed view of how financial activities influence an organization’s overall position. It works alongside the statement of financial position, which provides a snapshot of assets, liabilities, and net assets at a given point in time. While the statement of financial position shows total net assets at the beginning and end of a period, it does not explain the reasons behind these changes. The statement of changes in net assets fills this gap by detailing specific increases and decreases.

This statement also complements the statement of activities, which outlines revenues and expenses over a reporting period. While the statement of activities provides a broader view of financial performance, it does not track shifts between restricted and unrestricted net assets. By linking directly to these changes, organizations can see how revenue sources and spending patterns impact long-term financial sustainability. For instance, if a nonprofit generates a surplus in a given year, the statement of changes in net assets will show whether this surplus is available for general use or restricted for specific projects.